Q2 2022 Commercial Vehicle Group Inc Earnings Call
China.
and the Russia Ukraine conflict and a near-term disruption in the warehouse automation sector. So we had quite a few events unfolding in our business through the first half of this year, and we're going to give you an update on how we've attacked them. And that said, and as we'll discuss with this call, we substantially work through these challenges, and we believe we're firmly set for an approved second half.
For the second quarter of 2022, we delivered sales of...
$250.8 million compared to $257.9 million in the year-go second quarter. The climb was primarily driven by a temporary industry slowdown. The climb was primarily driven by a temporary industry slowdown.
in warehouse automation building and the COVID lockdowns in China.
Our operating income was impacted.
and was 6.2 million compared to 16.3 million in the year of those second quarter. And the year of those second quarter. And the year of those second quarter.
This decline was primarily a result of a contractual lag and price cost.
Lower volumes during the quarter and startup costs associated with new business wins in the last two months. $1 million. $1 million. $1 million.
Importantly, we expect a lag and price cost off-sets and the peak in the investment and startup costs that we incurred a ramp-up in business or now behind us. We are in debt to the public so they work for us in public. Thenow our stock was set up for move in on pinnows to go through the investment that we incurred a ramp-up in business or now behind us. Yeah.
and as we have begun the third quarter.
Of no, we have reprised the majority of our customer contracts, which we will expect will add more than $15 million to our profits in the second half of this year, and more than $30 million on a full-year basis, depending on subsequent inflation area or other pressures. Additionally,
We had been experiencing high one-time startup costs associated with a few of our new business ones. We believe this has peaked and has behind us. Looking forward, our new business has ramped up to a level whereby we expect to absorb and offset our investments in new business startup costs. These are two significant hurdles that we have cleared and we believe we are now behind us.
Adjusted EBITDA was $12.4 million in the second quarter compared to $21.6 million in the second quarter of 2021. We delivered $0.13 per adjusted share in the second quarter as compared to $0.33 per diluted share in the year of the second quarter. Of note, our new business development continued to gain momentum as we've now secured an additional $104 million of annualized new business.
electric vehicles where we are supplying the entire design and procurement for the electrical wiring systems. These are truly exciting wins for CVG and demonstrate our position as a leading supplier of electrification systems.
We also continue to invest in technology to expand our position, expand our product offering, and we're excited to open a new engineering center at Phoenix, Arizona for electrical system R&D. The center will be focused on our continuing development of high voltage distribution systems and distribution boxes for the electric vehicle market as well as providing fast prototyping services and testing for new electric vehicles.
As we exited the second quarter, we remained firmly on track to meet or exceed last year's record of more than $200 million of new business awards. While our new business momentum is strong, we're also seeing improved cash flow generation, and we generated and delivered $11.9 million of free cash flow in the second quarter, which we use to pay down debt.
We firmly remain focused on improving our cash flow and paying down debt, which we believe will also translate to improve shareholder value over time. And for the full year, we're reconfirming our target of 25 to 40 million of debt paid down over the full year. Turning to page four in the earnings presentation. We've made significant progress. We've made significant progress.
So far this year on many transformational fronts, and we wanted to highlight just a few.
We've significantly improved our pricing across our customer base to ensure that we're earning an appropriate margin on our products given the severe cost inflation that we've experienced over the past year or so.
We also continue the execution of our cost restructuring plan, including vertical integration of certain production, regionalization of certain supply, and targeted headcount reductions to manage our cost structure.
The China lockdown is now behind us, and we have seen our operations in the Ukraine markedly improved during the ongoing war.
Class A truck production appears to be on firm footing as the OEMs are reporting being fully booked out for the remaining of 2022. The OEMs are reporting to the OEMs.
The extra margin on new business is now off-setting.
Now being offset.
It's now offsetting our one time startup pass, so we believe we're clear at the bar now.
and will benefit NAT from our new business endeavors. Lastly, our cash flow improved in the second quarter, and we expect that trend to continue to the end of the year. The end of the year. The end of the year. The end of the year.
While we have more to do, and as we continue to fight inflation and battle supply chain challenges.
and ramp up over 100 new programs that we've recently won. We expect the second half to show improved performance in our best sense. See you soon from a new generation of staff.
Turning to page 5.
I wanted to give a few comments about our three main end markets.
Our largest end market remains the North America Class A truck business where production has been constrained due to supply chain challenges and the result in product shortages. That said, second quarter Class A truck builds were up sequentially from the first quarter of 22 while the outlook for builds continues to improve. And in fact, many of our major OEM customers are taking their production rates higher, which has led us to increase our forecast.
for full year 2022 Class 8 bills to be a range of 290,000 to 305,000.
Class A tractors as compared to our prior full year forecast of 275 to 290 that we discussed in the first quarter. Our forecast compares to ACT's current forecast of 305,000 trucks. While a recession would impact build rates and the production outlook, the industry has been producing below replacement level for several years.
which has resulted in a further aging of the North American fleet, which will add strength to our aftermarket business.
Additionally, and as discussed,
We have negotiated pricing with our two largest customers and many others. These two customers alone represent 30% of our company's total annual revenues.
and have previously carried negative margins.
This bodes well for both our profitability and revenues.
as volumes pick up combined with cost inflation, which is peak and starting to come back down.
and just as a reminder, every 10,000 trucks.
equates to about $13 million of sales for CBG, while our contribution market should trend above historical levels given our recently enacted price increases.
The next big market for us is the electric vehicle market.
And it's set to become our largest end market in the coming years as the transition from internal combustion engines takes place.
In fact, the US electric truck market is expected to grow at a 54% cager.
over the next 10 years per PNS intelligence. Additionally, the global conversion to electric vehicles and fuel cells has expected to disrupt the legacy market dynamics, and we are well positioned to benefit from the coming change. We are currently on over 300 electric vehicle platforms globally, as we position CBG as a leading supplier of electrical systems around the world. We have achieved this outcome in just two short years in our platform count and pro-form up to...
globally and has temporarily paused their new warehouse investments. And this is impacting our results and will continue to do so over the coming quarters. Importantly, we remain well positioned in this sector and recognize the need to diversify both our customer base and our product set to ensure we deliver more consistent and higher growth. Thank you. Thank you. Thank you. Thank you. Thank you.
To that end, we recruited and hired an experienced executive from the industrial automation management sector to lead our warehouse automation segment, and he began in June . We believe his leadership will be instrumental in expanding both our customer and product set while returning the segment back to growth over the next year or so as our largest customer resumes building new warehouses. Coming to page 6.
Just a few more comments about our electrical business. We believe that we are an emerging leader in electric vacation systems across Class 8 trucks, electric vehicles, and industrial equipment both here in North America and in Europe while we are making strong progress entering new markets like aerospace and defense.
We have in-house capabilities for custom designed low and high voltage.
systems and have invested to automate these processes in both North America and Europe .
We also partner with battery providers to supply full solutions for our OEM customers.
And importantly, we serve these end markets with a full array of products, which provides a competitive advantage as we can supply a full solution, including cap structures, interior trim, exterior trim, doors, mirrors, sensors, wipers, and seating solutions. We are one of the few one-stop shops in this industry.
Over the last two years, we have won business with over 50 OEMs.
And as mentioned, we are on over 300 vehicle platforms and are currently ramping up right now on over 100 platforms across the globe. While there's uncertainty over who will be the winners and losers in this market, it will be coming through a transition to electric vehicles. And we believe we have a balanced customer portfolio consisting of well established incumbents.
and well-capitalized new entrance.
which provides confidence in our ability to drive revenue growth and margin expansion in the years ahead. This is an exciting part of our company and we are fully invested in this market segment. Turning to page 7 is to give you a little bit bigger picture on our organic new business wind program. We expect our new business winds to contribute $154 million in revenue this year.
and ramp up to more than $300 million in 2025.
Electrification is the largest contributor to new business revenue growth, which we expect will ramp from 35 million this year to more than 200 million in 2025. Warehouse automation also remains a significant contributor to our new business momentum, though we have reached a pause in this segment as just discussed and are confident that we can return this segment to growth given the strong secular tailwinds that exist in this industry with e-commerce. We have lost no net new positions.
This is a situation in our particular business performance that's due to a temporary pause by one of the big market players. And while we have one new business worth more than $2 billion in lifetime revenues, we are
We're not standing still. We have a robust new business pipeline that we have been carefully cultivating and are working hard to convert to new business wins. And ending the second quarter, our pipeline on new business opportunities stands at approximately $5 billion. And it stands at approximately $5 billion.
and it spans electric vehicles, warehouse automations, heavy and medium duty trucks as well as new emerging opportunities and commercial aerospace and defense. This provides visibility to future new business wins and continue to no matter. Test
When you do the math here on the new business one in our pipeline, you can see that we're running around a 10% hit rate, and that's our expectation going forward. Turning to page 8. We're running around a 10% hit rate, and that's our expectation going forward.
We have three focus initiatives that are designed to expand our business and the fast growing end markets and improve our profitability.
As we expand our business, we're working aggressively to reduce our dependence on complex supply chains while driving improved pricing terms of our legacy customers as we strive to unlock profits that have been latent within our business.
As we have discussed this morning, our business is at a profit inflection point and our new business ones are also translating to revenue and now fully absorbing our investment and start-up costs while our renegotiated pricing with the majority of our customers is expected to add approximately $15 million to second half profits. Additionally, we generated almost $12 million in free cash flow in the second quarter, as we mentioned, and we expect our free cash generation to be a success.
to further improve in the third and fourth quarters, which we will prioritize for debt pay down as we work to lower our leverage ratio.
Turning to page nine, we're very proud of the work that we are doing regarding ESG at CBG. We are doing regarding ESG at CBG.
This ESG work will continue to outline our commitment to the environment as we work to minimize our impact through the reduction in our global carbon emissions. The ESG work will continue to outline our commitment through the reduction in our emissions. The ESG work will continue to outline our commitment to the emissions. The ESG work will continue to outline our commitment
This is very consistent with our focus on the electric vehicle markets and we're embracing our own initiatives and targeted reductions in these areas.
We also continue to be focused on our employees and remain committed to a diverse workforce with a continued focus on safety as well as career advancement as we strive to be an employer of choice around the world.
Lastly, we have a solid governance program and a committed board of directors who remains very engaged and provides excellent oversight to our ESG committee. And this clearly demonstrates the importance of this initiative from our board of directors down to our factory floor. Turning to page 10.
I would like to conclude my remarks by restating that we are at a clear inflection point, very proud of the work our team has done to get through this record spike in inflation and get in front of it with corrected pricing algorithms and price levels.
And we expect this performance to turn up in results in the second half of this year and beyond.
We've cleared significant hurdles to our results and are positioned to increase our profits in the third quarter as we benefit from improved pricing, moderated cost inflation, and improved truck build outlook, and in our case, the reopening of our China plant.
a corrective Ukraine manufacturing operation in full absorption of our new business startup costs.
We also continue to win new businesses we go, including this month. And we are firmly committed to organically growing and diversify our company and establishing ourselves as a critical supplier of electric and electrification systems in the world. We are now in the world of electric and electrification systems in the world.
Taking together, we are firmly on track to reduce the cyclicality of our business as we expanded to new secular growth industries with improved profitability as we work towards our goal of delivering 1.9 billion in sales in approximately 8.5% adjusted income margins so for the next 3-5 years.
Additionally, as we work towards our goal, we will see our cash flow improve, and we will use that cash to continue to invest in our business while also strengthening our balance sheet and paying down debt.
Now I would like to turn the call back over to Chris for a more detailed review of our financial results. Chris, thank you, Harold. If you're following along in the presentation, please turn to slide 12. Please turn to slide 12. Please turn to slide 12.
Second quarter revenues of 2022 were $250.8 million as compared to $257.9 million from the prior year period. The 2.8% decline was primarily attributable to reduced volume in our warehouse automation segment as Harold touched on and the impacts of the COVID lockdown in China.
These impacts were partially offset by increased revenue, resulting from renegotiated pricing, to offset material costs increases across our other operating segments.
Foreign currency translation unfavorably impacts our second quarter revenues by 4.8 million or 1.9 percent compared to the prior year. Our gross margins decreased a little bit to 8.7 percent compared to 13.3 percent in second quarter of 2021. Primarily due to a lag and price increases to offset cost inflation and 2.9 million at new business start-up costs which we expect to impeach this quarter. We expect to markedly improve our gross margins beginning in the third quarter.
Given the renegotiated pricing, he'll discuss.
The company reported consolidate and operating in company 6.2 million for the second quarter of 2022 compared to 16.3 million in the prior year period. Primarily due to the previously mentioned lag and price increases, combined with 2.9 million of business start-up costs and 1.8 million of restructuring expenses due to our continued execution of our core business optimization.
On an adjusted basis operating income was $8.1 million excluding special charges. Adjusted EBITDA was $12.4 million for the second quarter as compared to $21.6 million for the prior year. Adjusted EBITDA margins were 4.9% as compared to the adjusted EBITDA margins of 8.5% in the second quarter of 2021. This margin contraction was due to the previously discussed factors. Our interest expense was $2.1 million as compared to $2.8 million in the second quarter of 2021.
The interest expressed a decline compared to prior year due to the company's new data agreement, which was completed in the second quarter of 2021.
That income for the quarter was 2.5 million or 8 cents per diluted share as compared to that income of 5.1 million or 16 cents per diluted share in the prior year period. Now turning to our segment results.
Our vehicle solution segment delivered second quarter revenues of 142.8 million compared to 132, 130.2 million in a year ago quarter, primarily due to material cost pass through. Operating income for the second quarter was 1.5 million, a decrease compared to operating income of 8.2 million compared to the prior year, primarily resulting from the expected lag in our increased pricing offset cost and increases in new business start of costs.
The second quarter of 2022 adjusted operating income was in line with GAAP operating income of 1.5 million.
Our warehouse automation segment produced second quarter revenues of 28.5 million, a decrease has compared to 54.3 million in the second quarter of 21 due to lower demand levels. in the second quarter of 21 due to lower demand levels.
Operating income was 1.3 million at decrease from 8.5 million compared to a year ago, and adjusted operating income was 1.7 million. As Harold noted, we have seen a slowdown at volumes, as our largest customer re-evaluates their demands.
Turning to electrical systems, the segment achieved revenues of $47.3 million, an increase as compared to $44.2 million in the year ago second quarter due to the realization of material cost pass-throughs. Operating income was up to $5.9 million, an increase of $6.5 million, an increase of $2.8 million as compared to the second quarter due to higher volumes of material cost pass-throughs. Operating income was up to $6.5 million, an increase of $3.5 million.
Our adjusted operating and coming to this segment was 1.7 million at the client from 3.7 million in a year ago, Porter.
To conclude, we're pleased with the significant operational progress we've achieved in the second quarter. Of particular significance was our ability to continue to renegotiate pricing to offset the significant cost inflation we have experienced. Additionally, we continue to focus on reducing expenses through our restructuring program to ensure we are maintaining expense discipline and improving operational efficiency. We expect profits and free cash flow to improve sequentially in the second half of 2022.
This concludes our prepared remarks. I'll now turn the call over to the operator to open up the line for questions. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch to inform. You will hear it three times prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the number two.
One moment for your first question.
Your first question is from John Frandreb.
Siddhu, please go ahead.
Good morning, Howard and Chris. Thanks for taking the questions.
Guys, I guess I want to start with your change in sentiment in the Class A trucks. Certainly it's a positive. What kind of confidence do you have beyond the second half of 2022 in the sustainability of it? You've always been a little bit more cautious about the recovery there. Maybe a little bit of an update on your near term and a little bit longer term thoughts.
Yep. Um, you're correct that we're.
cautiously moving up our outlook here. We obviously do have visibility.
from all of our major OEs and they're all public reporters. So you can also corroborate our comments with them and we pass along the ACT information. So there's an allocation program going on in North America. So there's an allocation program going on in North America.
where the dealers and fleet owners want more trucks than can be made. And the main OE's have stopped taking orders for this year because they're sold out and they're allocating slots for 23 and they're really...
Putting pressure on us, John , to get our output up.
so that they can get more trucks out.
We are a big supplier into this industry, so we are one of the holdups, if you will, not the only one that is axles and breaks and other things.
There's a lot of pressure to get out.
and we have plans to increase our output. We're not... I'm careful not to...
We haven't increased expectations on us yet, but we can see that there's firmly a need for us to increase our output and we're trying to do that by adding capacity. We are OEMs, sir.
Effectively sold out having said that if we could make the parts for another 10,000 trucks they would make those trucks and sell them so that the industry is capacity constrained right now John and that goes out for four quarters.
Okay. And in contrast to that, you talk about the contraction you're seeing in the warehouse automation market.
do a
key industry player reevaluating, I guess, the spending plans.
Can you kind of give us a little bit more color on to how long that's been going on and how long it will take? Do you have any kind of insight when those decisions will be done and how that will impact you in the near term? Can you give us a little bit more insight when those decisions will be done and how that
Yeah, so there's a big e-commerce player that has about, that accounts for about 48% of the spending in North America on warehouse automation investment. I think you know who that is, but we're not allowed to say their name.
But they're a public reporter and they've been public about.
that they overbilled a little bit in the northeast part of the US and they were re-evaluating their spending plans.
And the reevaluation is really balanced between how many new warehouses do they need versus how much investment should they make into existing warehouses to increase their labor productivity. And through pipes.
were participant in either of those. But the
This particular player who we're tied into a lot and directly through an integrator.
has not committed yet what exactly they're going to do they're taking away to see approach having said that they're in the paper this week talking about big plans in the state of New York and elsewhere that this week talking about big plans in the state of New York and elsewhere that
are bigger than ever before.
There's a little bit of uncertainty, John , right now in that business. We decided to be conservative.
and right-size our cost structure, we...
We declared a WARN Act at our Baltimore plant, which you have to do if you lay off more than 50 people and right-size our cost structure.
And so, you know, we had dinner with them this week. We're trying to get clarity. The way that that industry operates for us and others is...
The quoting on the new builds are done towards the end of the year and the beginning of the year and then production starts at mid-year. So we're on pause right now for the second half, John . Let's go.
That's our true visibility right now in that business.
In your slide deck, you talk a little bit about targeted M&A, maybe to help some of your vertical integration. Well..
Can you just talk a little bit more about what kind of...
M&A targets we're trying to pick them about here.
Yeah, um
Um, several.
So M&A can accelerate any of these areas for us really. We are on winning new bests.
We have successfully penetrated the aerospace business which we mentioned. There are some wire harness specialists in that area that could accelerate our know-how and de-risk.
our business programs and keep our startup costs under control. So we have some M&A we're looking at to help us on the revenue portfolio, diversification and then also on the core business optimization.
In essence, we're very exposed to global inflation because we source a lot.
And so at least nine months ago, maybe four quarters ago, we started to vertically integrate.
in metal fabrication, in our seating business, and in our cap structures business.
and started making parts that we had been buying for over 10 years.
And there's some...
There are some participants, that suppliers in this industry that have the account of equipment we need to further vertically integrate. The looks we've been having here, John , suggest that. The looks we've been having here, John , suggest that.
when we vertically integrate. When we make versus buy, we capture about 15 percent margin back to ourselves.
in the areas where we're looking to vertically integrate our areas that are permanently in our products.
that we intend to keep. And so they're kind of forever bets. And so it would make us more profitable and it would reduce our working capital. So.
We have a couple we're looking at right now on both fronts, both on revenue diversification, as well as vertical integration.
All these things have risks of happening or not happening and you're a player in the process as you know. And so we feel firm about our guidance saying that we're going to generate cash and pay down debt. That's our base plan.
But if we get a chance to accelerate and quote a good deal
We'll take it, but we have nothing sitting in our lap right now, John .
Okay. And one last question, and kind of ties into something you just said. You know, you can't stay.
and awarded the late June in the aerospace industry. Could you give us a little, I guess you can't name the client, maybe the kind of platform that you're selling into?
Something any additional color would be helpful.
Yep, it's one of the top air commercial aircraft makers in the world and their headquartered in North America. They use amans?? station to demonstrate their intercepts and further the beginnings of the commercial aircraft to the world. They use the intercepts and further the12 vehicle Parao?? could access a compile engine broke and board has controlled its vehicle twin the easy públiced adjust with theseible engines. So aqui, based on these lights that are in the lightweight automatic engine, they are still very functional, click on the instructions to align the before? America.
and it is wiring harness for the cockpit.
Thanks for taking my questions. I'll get back in the queue.
questions are going to be back in the queue. Thank you John .
Your next question comes from Chris Howe, Barrington Research. Please go ahead.
Good morning Harold, good morning Chris. Thanks for taking the questions. Hey, I wanted to start off with which has been a common theme across my companies, which is currency. Can you just talk about the global exposure on revenue? I know you don't give full year guidance on revenue, but perhaps you could kind of...
Good morning, Harold. Good morning, Chris. Thanks for taking my questions. Hey, I wanted to start off with, which has been a common theme across my companies, which is currency. Can you just talk about the global exposure on revenue? And I know you don't give full-year guidance on revenue, but perhaps you could kind of give.
an idea of the magnitude of Hedwyn that currency could present for the business here moving forward.
Yeah Chris, great question. You saw it, we were impacted already this quarter a little bit, as the dollar continues to strengthen. There's kind of a two-pronged impact to our company. And while the revenues get impacted more negatively at the dollar strengthens, if our overseas businesses grow, as we pay cash to fund businesses outside the US, obviously that our expenses go down.
We're primarily North American based Chris 70 plus percent. So overall the exposures will be less than if we were, obviously 50 percent or greater. But you know, the exposures will go up as our overseas businesses do better, such as China or Europe , Ukraine and so forth. And we saw that a little bit this quarter. Hard to predict based on how the dollar is going to move.
But in general, I think from a cash flow standpoint, it helps us overall as we fund our operations globally and starting in dollars and convert. But then it hurts, obviously, as we translate those sales in non-US currencies. scent.
I'll give you a specific one too, Chris. We buy fabricated metal parts in China and R&Bs depreciated about 7%. And R&Bs depreciated about 7%.
to the dollar and we immediately went back and got a 7% price decrease from those suppliers. So to Gris's point we're sourcing in these foreign currencies mainly selling in U.S.
It's net help through...
through all of that. So we are monitoring it.
And you know, it's very specific on the flows of the current seats, but
It's not a huge topic for us, but it should not help us a little.
Okay, and then shifting to your long-term outlook.
I'm correct here. Before it was 2025 and now I think the timeline is 2025 2025, 2025, 2027. Do I have that correct? 2025, 2025, 2027. Do I have that correct?
Yeah, so we gave a range and we also flattened out our new business win outlook. So what's been happening, you know, you can see the reporters here, RIVians, everyone is flattening out their production.
plans. It's very EV dependent, so our winds are very EV oriented.
and this is tied into the whole shortage of chips and everything. So as our customers have flattened out their revenue guidance.
we're a tack-a-long.
They're caveating their outlooks also based on supply chain availability.
We're doing the same thing. We're mimicking it and we're mimicking the revenue profiles of our new business wins.
crossing anything else on that. Oh, that's exactly right here. And I think, you know, as these winds come in and the EV players kind of modify their...
supply and demand will adjust as Herald's head accordingly. Okay, then if I extrapolate the long-term outlook and focus on the aftermarket segment, you still kind of reiterate or reaffirm that Kager that you mentioned previously, I think it was.
a 10% cager on the aftermarket business longer term.
Yeah, we left it out of the deck just because there's so much things happening in the business. But we're building a new plant in Piedmont, Alabama for the North American aftermarket business. It's on track. Robotic welding, robotic painting.
And it's our main A items.
We finished our e-commerce platform, working with Spotify, Shopify, I mean.
ecommerce platform working with Spotify, Shopify me and
We have a build plan to put all our items in stock so that people can order and we can ship from stock. We're currently making order after market business and it's going to be a business model ship.
And then to do that you have to get into the software and the search engine optimization and all the internet search stuff. So we have that whole program that's underway. We hired an executive last fall that understands that whole business very well.
And our internal expectations are a lot higher, Chris, than that. Yeah, yeah.
because we've been...
I don't know. Lots I fail, lots I fail player. And now we're going to very aggressively go after the aftermarket and be set up. Yeah. So it's on track. And Chris, the failed mention that it's prepared remarks, the aging of the class A truck fleet. It might help us in the future. It's a spur a little demand. So that could benefit that cater as well.
Perfect. And I'll just throw one follow-up question on that and then hop back into you. You have a new plant in Piedmont, Alabama. High expectations for the aftermarket.
Can this Cap X cycle
When will you have to reinvest again? Can this plant support growth over the next three to five years or will you have to look at other options? Can this plant support growth growth growth over the next three to five years or will you have to continue revival falling on you? option.
No, we're just manning it at one shift right now. So it's not going to be capacity limited for three to five years.
Okay.
All right, thanks for taking my questions. Appreciate it. Thank you. Thanks, Chris. Thank you.
Thank you. Your next question comes from Matt Bruckler, GAMCO. Please go ahead.
Hey, thanks. Good morning. Thanks for taking my questions.
So a decent amount of moving parts in two queue, and you mentioned that Russia, Ukraine, and China lockdowns, where a headwind is there any way to maybe quantify how much it impacted the quarter, and then I'm assuming these headwinds are going away as we move into the third quarter.
Correct. The China operation was a big deal to us because it's our most profitable business unit.
and it's fully restarted now.
and we're committed to having our full year plan implemented. We're going to be playing catch up there. Chris, any? Yeah, just to get a little more specific, man. I think the demand there is going up and down. You know, we supply...
products in Asia. And so similar to the U.S., there's some pent up demand there, but it's just hard for us to tell, you know, the timing of that based on supply chain and so forth. But I think what Harold said is generally it's our most profitable location and it bodes well that we can go back to near full production in that site. It's a seeding plant in China that exports seeds to Korea and Japan.
And so it's very good revenue and we have very high-end suspension seating products that are bought out of there.
It's material, that's what we mentioned it on our profits that really hurt us in the vehicle solutions business.
As Chris mentioned, as a reason why we really tanked in that segment, we lost our sweetest piece of it. The Ukraine is in our electrical systems business. The Ukraine is in our electrical systems business.
And we were, it ended up mainly being an output thing that because we were able to...
negotiate a margin recovery with our largest customer there, Volkswagen.
And you can see that the business unit, that segment, did fine. And it will continue to do fine. So that one's mainly going to be output recovery. So we should mainly get more revenue now that we have. We had to, this year, we had to build two new plants on the fly in the Czech Republic as alternate supply to the Ukraine operation for the main A-items for VOTE.
for Volkswagen and I can say their name because they connected themselves to us on the internet.
And so we worked with him to move a lot of passenger car electrical systems to the Czech Republic.
We have our output where we need it. It's still a terrible situation in the Ukraine, and our town still gets bombed. It's still a bad deal. But answering your question on financials, we've achieved stability. In the second half, we'll have more operating income in the vehicle pollution segment due to China starting out.
in the electrical business, it will be more revenue, but the profits are going to be similar.
Okay, that's very helpful. And then second question, you guys have done a great job in terms of garnering incremental price. You've laid out how you think it's going to impact the second half of this year, which is definitely helpful. But maybe talk to what percentage of the business hasn't repriced at this point and your expectations for if you think you're able to get price increases on that business. Thanks.
Yep, it's a good question. So we still have about 20% of our revenue trapped.
So we have some contracts.
that expire in the third quarter of 23.
And they're with big companies and they've been unwilling to negotiate and we don't have an out.
So we're living with a couple of old contracts or bad, if you will. So they're negative. So they're negative.
and we're living with them with regards to pricing.
We have a lot of pricing out now. New pricing still so...
What we've done is we've broken our contracts for a lot of expires as we incur inflation we're going out with new pricing. So we actually expect to continue pricing aggressively through the second half to maintain our profit margins. And we're now, and it took us a lot of get there. I had to break a lot of agreements.
but we're now in a position so that we can price to the market and maintain our profit rates.
So we have a whole, we talk about pricing is kind of what we talk about at the coffee machine here. So yeah, we're vibrant with pricing. We have a dedicated teen monitoring our pricing. We monitor our pricing by customer by plant by product. We're doing search searches. We're doing search searches.
for everything, fuel, freight, steel, foam, plastic, leather.
The industry term is RMSs, raw material surcharges, and so we're vibrantly pricing it.
It's a very dynamic topic for us. So we weren't sure how to talk about it in this call.
And so, but we wanted to be clear the significance of the increases that were kind of tied to July 1. The increases that were kind of tied to July 1.
And we had our top customer tied to July 1 reprise.
And that's more than half of the price increase and it's already risk distracted into the EDI. It's our those prices are happening right now. And by the way, we have new payment terms with that customer. So that's going to really help us on working capital to a lot shorter payment terms. So it's a vibrant topic, Matt, for us. But we do have 20% trapped. But we do have 20% trapped. But we do have 20% trapped.
down until third quarter next year.
Okay, helpful. Thank you.
Welcome.
Thank you. Your next question comes from Barry Hayes. Sage Asset Management. Please go ahead.
Thanks so much for taking the questions. I had a couple. First one is referring to the long-term slide. We had the 22 to 25 revenues and margins. My question is on the margin side. What's the right way to think about the margin progression as we go?
through that period, given that there are startup cost issues, there have been
you know, some of the price cost issues you were just talking about. So is the March and Target more back in loaded or is it rateable across the period? I love any insight on that. That's the first question.
Yep, on margins.
The margin rate will make significant progress in the second half of this year, to be honest. And so we intend to equally step up that ladder. So it's not back and loaded. We're trying to get to it now. And we can't get there now because we have a certain part of business trapped at an end of the number. But that's going to end. It's a very bad idea. It's a very bad idea. It's a very bad idea.
We haven't given year by year guidance on that yet, Barry, not against it, but we've had so many moving parts. It's been weird, it's been a weird year, but we've stayed in front of it, net. We've seen some of our peers have lost money in the first quarter, second quarter. We've stayed in front of that, but we've been compressed. We've stayed in front of that, but we've been compressed.
But we're going to make a dent on it in the second half of this year, Barry.
I think some of it, Barry, is going to be helped through our restructuring plans and cost savings initiatives, some through our revenue diversification, depending upon which markets kind of move up for us. And then the big item that we've been fighting, as Harold mentioned, is just pricing against RMS and so forth. So it's kind of a three-pronged attack there. Got it. Thanks. The second question was related to the aftermarket. You talked about some of the changes there.
and the price cost lag in terms of the down margin and the quarter. But normally I think of aftermarket as parts of the service as something that you can change price on fairly quickly. So we would love any color as to what you think.
You know, what the lag is and why in that?
Yep, it's annoying, I agree. There's two parts. We have a backlog.
So we have about a three month backlog. So the backlog is already priced.
And so we've been carrying a backlog.
that in a rising inflation environment has compressed profit. And then we increase our prices, and then we have inflation again, and then we increase prices again.
So as this inflation really took off, it really damaged the profits of that business.
Now, I now, we now think we're in front of it.
We've definitely been accused of that by our aftermarket customers. The test for us, Barry, is are we losing any business? We do have competitors in the aftermarket.
and we haven't been so we've really, in all the repricing we've done globally throughout our entire business.
We've only lost a couple customers.
And we didn't really even care that we lost them. They weren't reckoning anybody anyway.
So I think we still have pricing power, Barry.
And our whole team is very committed to it. We're not internally fighting this. We are pushing the boundary.
and specifically an aftermarket we are.
And evidence of that is that we have
We have really long lead times in that business, and so if you can only imagine a truck that has a broken seat sideline and so paying seven or eight hundred dollars for a seat is not a big deal to get the truck back on the road. So...
We're kind of pricing into that as well.
We're not gouging because people have long memories that we're pricing up to the upper quartile right now. I think that this will be corrected going out in the here. I think that this will be corrected going out in the here.
Thanks, that's very helpful. Two other quick ones.
In the warehouse business, you talked about the percent of the market that the large customer is in terms of the percent of your business is it sort of in line with that or much more or much less and if you would take the big customer out, is that business still growing? So is it mostly the one customer or is there sort of more generalized foot out?
So the 50% customer...
It's 70% of our business. So we're more dependent upon them than just the market.
So...
when they take a positive as a bigger impact on us.
on our other customers were growing.
with the other customers and with the new gentleman that we hired, his name is Mania.
your hope stop hero bitch i have to say it three ways um... he's an industry expert on industrial automation
and he's redoing our pipeline and our product offering, and we already have a much more attractive Ford pipeline of business opportunities.
And so his knowledge is very additive to what we were doing before.
My hope is that we continue to lessen our dependence on that big customer, but we're still very engaged with that big customer and they're very...
You know, they're being cautious with their public comments, but behind the scenes they're super aggressive. They don't want to be any shared, anybody anywhere. them all.
We're giving, we're repeating the guidance that they gave to the market.
which is they're taking a weight and sea approach for a few quarters to see if the e-commerce
upward inflection at half post COVID stays at a higher trend line or revises back to the trend line. No matter what, they don't have that much extra capacity. So they will need to net build no matter which trend line you pick, whether it's a long pause or a long pause.
At the longer pause, it means that it's going to refer back to the original trend line it was on. If it's a shorter pause, it means it's going to state that e-commerce is going to stay at a higher level now. So they're just waiting to play that out. So they're just waiting to play that out.
We know more than this in the public market, but we're not allowed to say it.
God, thanks so much. My last question is...
Just on the free cash flow in the second quarter, which was terrific, but it was a very strong number versus a negative number last year, in spite of the fact that sales and profits were down. Could you just talk through what generated that strong free cash flow? Thanks.
which was terrific, but it was a very strong number versus a negative number last year in spite of the fact that sales and profits were down. So could you just talk through what generated that strong free cash flow? Thanks.
Chris doesn't get a lot of glory. Chris made that happen. Chris, you want to take it? Thanks, Harold. Good question. There was a lot of heavy lifting by the team.
We were able to basically manage our work in capital much more effectively, our inventories, our AR, as well as our AP. And the business generated more profitability, so that it all benefited us. Because sequentially it was a big change. And as we've stated publicly, we hope that this continues on in the second half of the year. So we put in some new efforts to try to drive down working capital.
we've talked about those publicly in the past and so you know these things start and they sometimes take several quarters and so I think we're starting to see some benefits of the efforts by the team so hope to be able to report more positive results in the coming quarters. And then I'll tag along on the big picture you know when COVID happened and we had so much sourcing from Asia and supply chains linked and and if you look at right now if you look at the ports in North America and June
They reached one of the highest levels again. The ports in North America clogged up again if you're not following that. And we're not getting beat up by it because we decided to invest.
into our inter-imitory profile to not cause damage to our customers or us. We have consequences.
if we shut down our customers. So we invested into safety stock, into our inventory profile, and then at the same time put these verticalization programs in place to make more parts than source them. And we made our profile more safe.
And so that peaked, that had a peak to it. And now we're whittling it down a little bit by doing verticalization. And we're not isolated from these shortages, but we have a big safety factor now that we did not have going into this. So I think that we'll keep, our internal plan is to feather this down. We're not over promising, have been calmed down in the inventory.
But we do intend to feather it down as far as that. And we believe that our startup costs have peaked.
It was public knowledge that we reached an agreement with Rivian, with whom we had a dispute, and we're happy with the outcome. The
And so that had caused some inventory irregularities as well. And that steady state also. So I think that the inventory and work capital investment, the worst is behind the sparing. The worst is behind the sparing.
Great, thanks so much for rolling the phone and all the hard work. Thank you so much for your time. Thanks for your time. Thanks for your time. Thanks for your time.
Thank you, Barry, for noticing it. Thank you. There are no further questions at this time. I will turn it back to Mr. Harrell, be this.
Thank you, Michelle. And thank you to everyone who joined and listened today. Appreciate it. And asked all the thoughtful questions of us. It definitely has been a hard year for the management team. And I'm glad that we're staying in front of it. We wish our profits were higher than they have been. But we've been trapped by fixed prices with escalating costs. And I'm thankful that we've turned the corner on that with revised agreements and increased price levels of that we can.
Get our profits back on track here in the second quarter and continue to win business and grow the company's profits and revenue profile. So thank you for your time today and look forward to speaking with you soon. With that, we'll conclude the call.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
This concludes your conference call for today. We thank you for participating in an ask that you please disconnect your lines.